Airbnb's (ABNB 1.54%) public offering exploded onto the stock market in December and quickly became the biggest IPO of 2020, opening at more than double the IPO price of $68 a share. The strong public interest in the travel company helped elevate its valuation to more than $86 billion just on the first day of trading.
That strong debut happened despite 2020 probably being the worst year of the company's 13-year history, as it dealt with significant declines and a growing loss related to the COVID-19 pandemic.
What's behind this apparent contradiction? How was Airbnb able to manage to have such a good year in such a challenging economic environment? And is there more to come in 2021?
Image source: Airbnb.
Fundamentally a great business
Airbnb upended traditional travel with its online platform that easily connects customers with individual rental property hosts.
As a vacation rental marketplace, theoretically, Airbnb's expenses should be low as compared with companies like Hilton Worldwide Holdings and Marriott International that operate and maintain hotels. But, right now, expenses to improve and manage the technology and infrastructure of the platform, as well as its marketing expenses, have increased as the company continues to expand its services and grow into new markets. Those expenses almost doubled from 2017 to 2019.
Before the pandemic, Airbnb's business was brisk. Gross booking value (GBV) in 2019 was $38 billion, a 29% year-over-year increase, and revenue came in at $4.8 billion, a 32% year-over-year increase. Management believes that Airbnb is still in early-stage adoption in what it explains in public filings is a "global shift in consumer preferences toward one-of-a-kind stays and experiences."
The pandemic creates major headwinds
Last year was rough and scary for most travel companies, and Airbnb was not excluded. GBV declined 39% and revenue decreased 32% year over year for the first nine months of 2020. The company is also losing money, with a $675 million loss in 2019, and a nearly $700 million loss for the first nine months of 2020.
That's better than other travel companies. Hilton sales were cut by half in the first nine months of 2020, and Marriott's were only slightly better. Airbnb's more private accommodations felt safer for many travelers than the big hotels, giving it some edge during these times. It also has an advantage during a recession because there's a large range of prices that overall tend to be less expensive than hotels and resorts.
At the same time, the company has developed its own brand of luxury residences and experiences that give it a broader range of products and services and greater opportunities.
Q4 results were better than expected, with a 31% decline in GBV and a 22% decrease in revenue over the prior year.
Image source: Airbnb.
The pandemic is still ravaging much of the world, and investors shouldn't expect great improvement in the fourth quarter or even in the current 2021 first quarter.
But there's so much opportunity for the company between its platform and experiences that no other company can match, and when travel does return, Airbnb is well-positioned to benefit.
The company is just getting started
Airbnb estimates its total address market at $3.4 trillion. Current GBV of $38 billion is just over 1% of that, and management believes that it will grow at the rate of travel spending.
The company also has a strong competitive advantage. While there are other vacation home platforms out there, Airbnb has a deep brand awareness that makes it the first stop for many vacation seekers -- the word "Airbnb" is often a substitute for vacation apartment. The platform has over 4 million unique hosts and more than 5 million dwellings that are only available on its site, fomenting a travel movement focused on community residences and experiences. This creates a network effect that brings the company greater value beyond sales and bookings. Airbnb can use that network effect to its advantage in potentially starting new ventures as well, like managing bookings for tour guides or for independent airlines.
In 2019, Airbnb set a record for new host signups, and 2020 might have outdone that had the travel industry not crashed so hard.
These are all indications that once travel resumes, Airbnb is ready to roll.
The stock is just getting started
Airbnb stock ended 2020 slightly up from the first-day trading price, but its price is already up 22.5% in 2021. The company is in a strong position to see future gains, and investors are already scooping up shares of travel-related companies that will benefit from an economic recovery, such as Disney and Carnival. Airbnb stock is likely to see high gains as vaccines get rolled out and leisure travel resumes.
